The
blue-ribbon panel on private company financial reporting is poised
to recommend that the Financial Accounting Foundation (FAF), FASB’s
parent organization, move to U.S. GAAP with exceptions for private
companies and that those standards should be set not by FASB but by
a separate board under FAF’s oversight.

A
majority of the panel members at their Oct. 8 meeting in New York,
including AICPA President and CEO Barry Melancon, supported this
model and structure. (For an explanation of the other models and
structures considered see the sidebar, “Models Explained,” at bottom
of page.)

“I’m
pleased the majority of the panel members supported the bold step of
a new, separate private accounting standards board under the FAF’s
oversight,” Melancon said in a statement following the meeting. “An
important benefit of having a new board is to help ensure the needs
of the private company sector are appropriately addressed in the
standard-setting process.”

Panel
members also expressed support for a “sunset” period (somewhere
between two and five years) so they can assess whether the
recommendations are working and whether additional changes need to
be made.

NEXT STEPS

The
panel’s staff was working to draft a list of recommendations before
the panel’s Dec. 10 meeting to determine how a separate board would
be constituted and interact with the FASB board. The panel will
fine-tune that draft at its December meeting and is expected to make
recommendations in a report to FAF in January. The report will be
public. FAF is likely to discuss these recommendations at its
February meeting but may need to deliberate further.

Many
speculate that FAF trustees will expose any proposed structural or
process changes for public comment, consider that feedback and
finalize a set of changes. Timing of the decisions around those
changes and potentially creating a private company board would be
closely tied to how quickly FAF can take action.

Judith
O’Dell, who chairs the Private Company Financial Reporting Committee
(PCFRC), said she believes that if FAF were to issue recommendations
for comment after its February meeting, the comment period would
extend beyond tax season to give practitioners time to respond.

Some
panel members and public comments suggested that FAF request FASB
postpone major changes in GAAP or further delay the effective date
of major new standards for private companies, particularly standards
relating to the convergence projects between FASB and the
International Accounting Standards Board, until FAF makes a decision
on the panel’s recommendations. Currently, private companies are
sometimes granted an extension for major projects.

Convergence
projects were singled out because they tackle some fundamental
accounting and financial reporting topics that could result in major
changes in how such things as assets, liabilities and revenues are
accounted for, and therefore could be costly to implement.

Also
related to cost is the need to determine funding sources for an
additional board. Possible funding sources could include cash
donations from individual firms or donations from foundations of
private companies, though the independence of those donors would be
considered when analyzing these sources. Additionally, having
part-time board members would be more affordable than full-time
board members, panel members noted.

A
RECONSTITUTED FASB?

Some
members who spoke at the October meeting supported a reconstituted
FASB with more private company representation. Billy Atkinson,
2009–2010 chairman of the National Association of State Boards of
Accountancy (NASBA), one of the panel’s three sponsoring
organizations, voiced support for a single board to ensure that the
standard setters are “at the same table” when it comes to making decisions.

“The
FAF and its processes for the oversight of standard setting are
sound,” Atkinson said in a statement. “The real challenges ahead are
the important public policy issues associated with the debate.”

Even
most of the members who support keeping private company financial
reporting standard setting under FASB said the board needs more
private company representation and that while the recent change to a
seven-member board from five is a step in that direction (especially
if the additional members are from the private company sector) it is
not enough.

“Showing
we have a board that’s receptive to the needs of private companies
may be the most important outcome,” said Mark Vonnahme,
retired executive vice president, Surety, Arch Insurance Group.

FAF
President Terri Polley acknowledged this need both in the meeting
and in an official statement: “It’s important that our trustees have
a thorough understanding of the issues affecting private company
standard setting as they consider the entire standard- setting
system,” she said. “The FAF stands ready to carefully consider
improvements in standard setting under its oversight.”

Leslie F.
Seidman, who was named FASB’s acting chairman, effective Oct. 1,
2010, wanted the panel to give FASB a chance to prove the board
members understand the needs of private companies.

“We’re
committed to listening to the concerns expressed by this panel,
taking those concerns seriously and seeing what enhancements we can
make to make sure we are providing relevant information,” she said.
“We need more resources throughout the process to make sure the
needs of private companies are brought up at every stage of the
process not [just] at the end.”

As
chair of the PCFRC, a group tasked with making recommendations to
FASB about how specific standards can best address the cost/benefit
considerations in the private company arena, O’Dell acknowledged
recent sentiment changes at FASB as a positive step but said she
still favors a separate board because she has not seen enough
progress to date.

“When
PCFRC first formed [in January 2007], it was my understanding we
would make recommendations that would be actively debated at the
board level,” and that has not resulted in appropriate GAAP
differences, she said.

In
its current capacity, the PCFRC makes recommendations to FASB, and
FASB decides whether to accept or reject them. A new separate board
would have the authority to modify standards for private companies
without needing permission from FASB.

Blue-ribbon
panel members who support a separate board said there should be a
system of checks and balances to ensure FASB’s perspective is kept
as a frame of reference to the private company board, and vice
versa. One way to keep that alignment could be by having a member of
each board hold a nonvoting seat on the other board, some said.

EITF AS
A MODEL?

A
compromise idea arose at the October meeting around forming a
private company group similar to the Emerging Issues Task Force,
which was formed in 1984 and whose mission is to assist FASB in
improving financial reporting through the timely identification,
discussion and resolution of financial accounting issues.

Although
FASB members do not vote on consensuses at Task Force meetings, all
consensuses must be approved by a majority of the FASB board. The
EITF structure did not seem to gain traction among the panel because
they said the same FASB board, even if restructured, would not be
sufficiently constituted with the private company constituent perspective.

Some
panel members said they would like to recommend a separate set of
standalone GAAP standards for private companies but recognized this
transformation could take a long time and wanted to make changes
more rapidly.

Many
had a strong desire to see an evolution to a separate set of
standards. How that evolution would transpire has yet to be determined.

The
October meeting was the fourth meeting of the 18-member panel, which
was created in December 2009 to provide recommendations on the
future of U.S. accounting standards for private companies.

The
discussion that took place followed an overview of the more than 140
public comments FASB received in response to a series of questions
relating to private company financial reporting. Comments
overwhelmingly cited a systemic problem related to GAAP for private companies.

The
18 panel members and participating observers represent a cross
section of financial reporting constituencies, including lenders,
investors and owners, as well as preparers, auditors and regulators.
The panel is chaired by Rick Anderson, CEO of Moss Adams LLP.

The
panel is a joint effort by the AICPA, FAF and NASBA.

Alexandra DeFelice is a JofA senior editor. To comment on this article or
to suggest an idea for another article, contact her at adefelice@aicpa.org or
212-596-6122.

MODELS EXPLAINED

During
the July meeting of the blue-ribbon panel on private company
financial reporting, members almost unanimously agreed that
the status quo is “unacceptable” and eliminated from
consideration models based on IFRS.

In
July 2009, the IASB released International Financial Reporting
Standards designed for use by small and medium-size entities.
IFRS for SMEs is a self-contained, stand-alone set of
financial accounting and reporting standards. Along with the
standards, the board released implementation guidance. It is a
simplified version of full IFRS.

Many
panel members indicated that, while the U.S. ultimately may
move to IFRS, the chosen model could evolve to encompass those
changes. However, the overall consensus was that having
private companies go to IFRS for SMEs in the U.S. right now
was not a good solution in the short term. Potential models
and related structures the panel eliminated from consideration
included Unmodified IFRS for SMEs and IFRS for SMEs Customized
(“Americanized”) for U.S. Private Companies.

Panel
staff revised the remaining models and structures, and
presented those revised options at the Oct. 8 meeting. They
included:

GAAP
with exceptions for private companies.

Baseline
GAAP with add-ons for public companies.

A
separate stand-alone GAAP for private
companies.

The
first and last models came with the options of having a
separate private company standard-setting board or a
restructured FASB. The baseline GAAP model only provided the
option of a restructured FASB. All restructuring options came
with recommendations that the Financial Accounting Foundation
should adjust FASB’s composition as necessary to include
“sufficient private company experience and perspective,”
including considering appointing one or more members whose
experience is primarily with the private sector to the
expanded seven-member board.

At
the end of the October meeting, the majority of the panel
members voted to support GAAP with exceptions and a separate
board that would set public company accounting standards by
modifying FASB standards.

AICPA
President and CEO Barry Melancon said he did not favor
reinventing standards, rather he envisions a new board that
would modify FASB standards by switching on or off certain
provisions as appropriate for private companies.